It's Just Money

Isn't this how we got in this mess?

I found this Kiplinger's "Truth or Bunk?" Quiz on Free Money Finance's site.  I haven't even finished the quiz, but I ran into this question and it bugged me:

"True or false:  Never buy a home that costs more than 2.5 times your annual income."

I knew they would consider the answer false, as it's become a somewhat outdated rule of thumb.  Interest rates are lower than they used to be when this was widely used.  But I answered "True" anyway.  Here was the response:

SORRY, WRONG!

Your answer A. True is incorrect.

The right answer is B. False

Good luck even finding such a house in many major cities.  Instead of the price, what counts is your monthly payment.  And that's affected by your down payment and the terms of your loan.

I didn't add the emphasis.  They bolded, "what counts is your monthly payment."

Seriously, isn't that how we got into this mess?

Nice Dinner for two at McCormick and Schmick for under $15

Here's a great deal that I found on Slickdeals.net.  You print the coupon here, and make your reservation online here.  They're trying to promote their online reservation system.  So, all you have to do is print the coupon, make your reservations online and write the reservation confirmation number on the coupon.  The coupon is good for $25 with no minimum purchase.  It's not good for alcohol, and you can only use one per table.  But for two people, it was an incredible deal!

We went to the one in Pasadena.  I had their Seafood Etouffee, which is like a jambalaya.  It has andouille sausage, chicken, shrimp and crawfish.  It's served with a nummy sauce and rice.  My Fiancee had the blackened catfish with mashed potatoes and steamed vegetables.  We enjoyed the bread, and drank water.

Before the coupon, our bill came to $35 after tax.  After the coupon it was $8.55!  They only charged tax on the after discount amount.  We left a $6 tip (appropriate for the pre-coupon total), and finished our very nice meal, with leftovers for less than $15.  What a great find.

The deal is good until the end of March, and you can go as often as you like.  We may just go again.  But next time we may just get one entree and an appetizer.  See if we can spend tip only.

By the way, if you're not familiar with McCormick and Schmick's, it is a fantastic seafood restaurant with fresh daily menus.

Latest Millionaire in the Making, a Heartwarming Reminder of What is Really Important

I have been a bit critical of some of the CNNMoney.com's Millionaires in the Making in the past.  The latest edition, however, is a heartwarming story that serves a very important reminder of keeping our money in perspective.

Daren Fike is a widower at 38, having lost his wife three years ago to leukemia.  Raising their daughter, Melody, 4, is now his responsibility alone.  Daren has not only done a very good job of saving money ($290k in retirement accounts, $84k in a taxable brokerage account), but has taught Melody some valuable lessons along the way.

"She saves up the money she gets from birthdays and holidays in her piggy bank," he said. "We go together to the bank so she can make her own deposits. She already knows what 'interest' is!"

I used be a new accounts rep at a bank.  One of the responsibilities included helping widows and widowers retitle their accounts after the loss of their spouse.  A number of official documents are required, such as death certificates, trust documents, notarized affidavits.  Through this difficult time, a sentiment was commonly expressed.  All this money means nothing now.  Daren expressed what so many of my former customers felt, "I would gladly give every cent I have to spend just five more minutes with my late wife Christie so you can be sure I'm not taking the time I have with Melody for granted."

CNNMoney.com Article: Easy ways to save $400,000

Good read on CNNMoney.com by Walter Updegrave, Money Magazine Senior Editor.  While I don't agree with all of Walter's articles, he's one of the better personal finance writers on the internet.  In this article, Easy ways to (really) save $400,000, he takes on the "Latte Factor" popularized by David Bach.

The Latte Factor is simple and, in principle, I agree.  The idea is to cut out the small, unnecessary expenses in your everyday life.  Like that daily six dollar Starbucks latte and muffin, or the daily afternoon juice with protein boost.  Like I said, in principle, I agree.  If you are spending six bucks on lattes and muffins, and another four bucks on Razzmatazz smoothies every day, you need to slow down.  Your wallet and your waistline definitely need a break.  Some quick nutritional facts:  Grande Latte, 260 calories (160 from fat), Razzmatazz Original size, 480 calories (112g of carbs).

But the simple truth is that few have daily routines such as that.  If you do, slow it down.  The five or ten bucks a day adds up quickly.  For the rest of us, the biggest ways we can save are not adding up the little things, but recognizing the big ones.

Walter offers three suggestions that can save you $400,000 over a lifetime.  1)  Drive less expensive cars, 2) send your kids to public (not private) university and 3) cut vacation spending by $1,000 per year.

I would add, 4) don't overextend your house purchase.  Yes, a larger house may have the potential for greater price appreciation, but while you are living there you will pay higher taxes, more mortgage interest, higher utilities and have more house to furnish.

Living Paycheck to Paycheck: Reality vs. WTF?

There's an article published by CNNMoney.com about a week ago.  A Nebraska family is struggling to make ends meet, living "paycheck to paycheck" on a $150,000 income.  Needless to say, they have taken a virtual beating on in the PF blogosphere.  Franky, Boston Gal, Free the Drones, Kevin at DebtFree4ever, and Moneymonk all wrote about the Schuett family.  The concensus seemed to be that the Schuetts need need some financial education, to put it lightly.

I came across another story yesterday in New York Magazine about a man actually living paycheck to paycheck.  Robert Gonzalez works from 6AM to 2PM as a security guard in New York City for $10 per hour.  He receives a bi-weekly paycheck for $676 and has two kids to support.  As the article begins, Robert has $4.41 in his pocket.  Just enough to get him through the day which, luckily, is payday.

Five New Yorkers' Spending Diaries

You ever wonder how other people spend their money?  You ever look at someone and think, "how can he afford that?" or hear a friend or co-worker complain, "man, is it payday yet?  I don't know where it all went!"  and you think, "yea, what the heck do you spend your money on?"

Well, New York Magazine asked five New Yorkers to keep a spending diary for one week.  They profiled a grad student being subsidized by his folks, a junior professional who makes 54k, a mid-career fund raiser with a $150k income, an investment banker who lives on a hefty expense account and pulls in about $700k, and a Wall Street trader who brings in over a million bucks a year.

This is financial voyeurism at its finest.  Like other personal finance bloggers, I share my net worth every month.  For some that's already too much information.  But a lot of factors go into that balance sheet.  Unexpected income, wasteful expenses, cost cutting brown bag lunches, investment gains or losses, all mesh together to form a month end picture.  But, as we all know, the devil is in the details.  I would never display the transaction record from my credit card statement.  I certainly don't need, "I can't believe you would spend $xxx.xx on __________.  What a waste."

These New Yorkers were anonymous, but they bared it all.

We know that the 26 year old, $20k Grad Student spent $34.10 for dinner on a Monday night at a place called Bombay Talkie.  He spent $15.08 on Olive Oil and Mayonnaise from a grocery store called Gristedes.  $15.08?  And his parents pay for his $140/month gym membership.

We know that the $54k per year Junior Professional had soup and steamed vegetables for lunch at Angelica Kitchen for $19.  Saturday involved seeing the movie Marie Antoinette where he bought Milk Duds and bottled water for $6.50 (that's pretty reasonable, actually). No mention of tickets, so someone else must have bought the tickets.  Dinner was soup and grilled chicken at Cafe Orlin for $42.  This was followed by beer and smokes from a bodega on 2nd.  A bodega is a type of store.  I had no idea.  Beer at the Phoenix cost $15, and another dinner (is it only called "fourth meal" when it's at McDonalds?) of grilled cheese, omlette and potatoes from Moonstruck Diner topped off the night at $27.40.

The $150k mid-career fundraiser seemed to have a better handle on expenses than the other two guys.  His total for the week was $529.27.  Still a lot by most standards, but less than the $639.06 spent by the junior professional who makes a third of his income.  And only $75 more than the grad student who makes about a seventh as much.  The i-banker spent over three grand in a week, only $1200 reimbursed.  Her downfall is shopping.  Nearly daily trips to Ann Taylor or Nieman Marcus.

It's kind of nutty to see a week in the life of the budget of a 41 year old trader, stay at home wife and two kids with a seven figure household income.  In one week, they managed to spend over four thousand dollars.  Granted $1700 was to their contractor for some work they are having done to their four bedroom upper westside apartment.  Another $650 was for charity ball tickets.  The mind boggling one, $650 was their share of the check for dinner at Da Umberto.  That is some dinner.

How about you?  Do you keep a food diary?  What would we be surprised about if you displayed it for all the world to see?

CNNMoney.com Reader Question

I thought this question, sent to Walter Updegrave of CNNMoney.com, was very interesting.  In two very brief paragraphs the reader reveals that she is tripping over virtually every stumbling block described by behavioral finance.  Here's the question:

We put almost all of our money in the stock market through our adviser in 2000 and we are still down! One account he manages went from more than $80,000 down to $30,000 and now it is back to $50,000.

We originally paid this adviser 1.5 percent a year, but after we complained he lowered the fee to 1 percent. We're thinking of giving him six more months to get us back to where we were in 2000, but we don't want to take our money out at a loss. What should we do? -Linda, Rutherford, N.J.

Walter has a pretty good response, but frankly I'm not so concerned about the response.  I just thought it would be an interesting case study to identify the behavioral finance pitfalls that Linda of Rutherford, N.J. wass falling prey to.  Let's make it multiple choice.  Which of the following apply:

• Loss Aversion
• Status Quo Bias (or Endowment Effect)
• Gambler's Fallacy
• Self Serving Bias
• Cognitive Framing
• Mental Accounting
• Anchoring

What do you think?  I think three clearly apply, you can make an argument for three others, and one doesn't apply here.

Housing: Up? Down? Whom do you believe?

What am I supposed to make of this?  Are you looking for news about the housing market?  I always am.  I think the housing boom has been fascinating, and I am curious to see how it all plays out, particularly with respect to its impact on the overall economy.  So, I found these conflicting reports particularly amusing.

CBSMarketwatch.com: "Housing Market Gains Steam"
CNNMoney.com:  "Home Prices: Record Drop in October"

Same day.  I guess the lesson is to do your own research.  Don't make decisions based on one article, one story or one guy you saw on CNBC.

Here are the screen shots:

Top 10 Most Affordable College Football Towns

Ah, I can see someone at CNN has been reading my blog!  Well, okay, maybe not.  But when an article, even loosely related to college football appears on CNNMoney.com, I can't help but feel a little warm and fuzzy inside.

They ranked the price of real estate in the towns for all 119 colleges with Division 1-A football programs.  In order to make an apples to apples comparison, they used the same paramaters for every town:  2,200 square foot, single family house, four bedrooms, two and a half baths, family room, two car garage in a "middle management type neighborhood."  I follow them right up until that last criterium.  Can't say I know what "middle management type neighborhood" means or how you measure it.

No big surprise in the results, the Pac-10 ranks as the most expensive.  Stanford, UCLA and USC are the top three, in that order.  Stanford and UCLA are to be expected.  USC is a bit surprising.  I guess that's where that whole, "middle management type neighborhood" part comes in.  Problem is, I don't know where that neighborhood would be.  Fellow California schools, San Jose State and Cal, round out the top five.  All five were in the seven figures.

At the bottom, Tulsa, Southern Miss and Ball State are the three cheapest at $151,238 and under.  The first traditional football power to make the cheapest list, is perhaps the biggest traditional power of them all, Notre Dame.  Turns out it only costs $181,066 for a four bedroom house with all the fixin's, in a middle management type neighborhood in South Bend Indiana.  Don't understand why Rudy needed to sleep in the facilities closet.

Heck, maybe I should pool some money with some college buddies and buy a house in South Bend.  We can rent it out on gamedays.  It would probably pay for itself in a few years if Notre Dame stays in the top 10.  Or maybe not.  Besides, I'd have to start rooting for Notre Dame.

Payday loans a threat to National Security?

This is the latest story according to the USA Today.  Apparently, millitary service men and women are among the most likely groups to incur high fee, high interest payday loans.  Among the taboos of personal finance, many of us in the blogosphere bemoan credit card debt, three dollar lattes, and failure to contribute to 401(k)s.  But it is clear that payday loans rank right at the top of the list of the ignorant, self destructive moves that anyone can make.

For millitary personnel it goes beyond the triple digit interest rates and fees, but all the way to their security clearance and eligibilty for deployment.

Worst of all, the practice continues to be defended by the payday loan association, which goes by the generic sound name, Community Financial Services Association of America.

Get a load of this exerpt from the USA Today article:

That's a misguided critique of a valuable service, says Darrin Andersen, president of the Community Financial Services Association of America, the payday lenders' trade group. The Pentagon, he says, "is in over its heads when it comes to ... complex personal finance and lending issues."

It's really not that complex.  Usurous triple digit interest rates are tantamount to Mob like Loan Shark tactics.  They should be illegal.

By the way, feel like spoiling your lunch?  Browse the site of the Payday Lender's trade group.  Oh, and they refer to it as the "Deferred Presentment" industry.